WATSONVILLE -- Watsonville leaders say an audit missed the mark in many of its criticisms, but agreed with its recommendations for improving management of city finances.

The 72-page audit, commissioned by the Santa Cruz County grand jury and prepared by San Francisco-based Harvey Rose and Associates, says the city is spending beyond its means, lacks adequate controls and oversight over finances, and is in poor financial condition relative to comparative cities.

But in a response to the grand jury approved on a 6-1 vote by the City Council on Tuesday, leaders said that while the city has been deficit spending to maintain services during an economic downturn, the situation is not as dire as described by the auditor.

"The city has maintained a high level of services," said Mayor Pro Tem Karina Cervantez. "There are concerns about the sustainability of services. We are concerned. But this isn't new information."

Auditor Fred Brousseau said the city's problems are serious, and though reductions have been made, they haven't been enough to stabilize the budget.

"The city wants to maintain high levels of services, but needs to do so with limited resources," Brousseau said. "Current practices do not appear to be sustainable."

Brousseau recommended the city establish a financial advisory committee to help guide spending policies.

Councilwoman Nancy Bilicich, the sole vote against the audit response, agreed with Brousseau, and suggested the city has been in denial about its problems.

"The bottom line is we're spending beyond our means," she said. "What happens when you write that check at the end of the month and there's no money. You can't have that service."

City Manager Carlos Palacios said recommendations would be brought back to the council as part of the annual strategic planning sessions.

"It's a question of prioritization," Palacios said.

City staff estimated implementing all recommendations, most of which concern tightening accounting, reporting and oversight policies and procedures, would run $1 million or more.

Lise Peterson, who headed the grand jury, said the council's role is to make spending decisions, but it's important they are made in a "fact-based, transparent way." The council's willingness to consider recommendations was a step forward.

"We're really looking for them to make the changes we suggest," Peterson said.